Development incentives

Who do I have to bribe?

YESTERDAY, I argued that it should be much easier for developers to build on city land as they see fit, but that the structure of local government institutions typically places strict constraints on what can actually be done with a piece of land. The problem is that government structures empower those who face negative impacts from new building relative to those who receive benefits from new building. Kevin Drum follows up on the post by noting that there should be a Coasean solution to the problem—winners should be willing to pay the losers to be able to build, such that everyone is happy—but it's difficult to see how to get there:

I'm certainly concerned about those things in my neighborhood, and I'd be unhappy if someone wanted to erect a 50-story skyscraper next door that turned the street outside my door into a seething, 24/7 stream of cars and weekend partiers. And unfortunately for prospective developers, that's an externality that's very difficult to mitigate. You can reduce it, maybe by paying for a street widening project or some such, but that's small beer. And in theory, you could simply pay off local residents. I might not like all the new traffic and noise, but if you paid me $5,000 a year to put up with it, maybe I'd mind it a lot less. But who do you have to pay? And how much?

In my post yesterday I linked to a new paper by George Mason law professor David Schleicher, in which he examines some of the governance issues surrounding zoning questions. He notes that urban economists might usefully study the issue of international trade. Trade, like urban development, creates net benefits, but the gains are widely distributed while the costs are focused on a small group that is therefore heavily motivated to fight trade liberalisation. To bring forward liberalisation, governments had to adopt a number of institutional changes that facilitated the kinds of Coasean bargaining Mr Drum suggests needs to occur. One example is trade-adjustment assistance, which is essentially a government transfer payment to those hit hardest by reductions in trade barriers. Such payments can shift the impact of openness on affected firms and households from negative to neutral or positive, thereby reducing opposition to and facilitating liberalisation.

Cities could do something similar. Mr Schleicher proposes a system of redistribution based on the relatively common institution of tax-increment financing (TIF). Cities increasingly use TIF to help pay for local infrastructure. It promises the increase in future tax revenue generated by a value-adding public investment toward payment for the investment itself. A variant could be applied to development. A large new project should generate greater tax revenues for the city. A portion of those revenues could be used to offset the tax burden of residents living within the area most affected by the development; say yes to the skyscraper, in other words, and your property tax bill should drop.

Ronald Coase suggested that efficiency was possible in the presence of externalities provided transaction costs between affected parties were low enough. This may be a case when government has a useful role to play in lowering those transaction costs.

Carone Plan issued by IMF-ECB-EC for improving Greek Healthcare, states that since informal payments and bribes to doctors in Greek public Hospitals are difficult to eliminate, they should be legalized and taxed! [1]

Widespread corruption exists for decades in Greek public Hospitals. [2][3][4][5][6][7][8][9][10]

This will mean that corrupt payments of implant or pharmaceutical Companies to Greek doctors will not be penalized, in the future!

Carone Plan also implies that bribes paid to Hospital doctors in order to have elective surgery in days, instead of many months or years, should be legalized too!

Is this the best plan expert IMF and ECB healthcare managers and economists have for Greece?

Is it logical to legalize theft and corruption because it is so widespread?

Corruption in Greek public Hospitals can be eliminated overnight, if swift and severe punishments are applied.

Public opinion in Greece has zero tolerance for doctors in public Hospitals who practice extortion for “under the table payments”.

This unfortunately works best when the scales get extreme. Example: my town worked for years to make the permitting process more predictable but that went out the window as property values increased, both because people had more at stake and because that signifies a desirable place to live and thus to build. As our economy got better, we added historic districts which not only override planning but substitute the personal judgement of a bunch of mostly low-end architects - e.g., people who plan house additions - rather than standards. So sure, you could offer a tax rebate but many people in the area have enough money to say no - and to say screw you to the older and poorer residents. To make the money attractive enough would mean exceeding guidelines by a lot and that would only increase opposition to the rabid animal level.

To work best, you need a relatively poor place and/or a place where you can build really big stuff. Not many places fit because relatively poor places are that way for reasons and really poor places aren't where anyone wants to build.

The problem (actually *one* of the problems) of the Coaseian solution is that it requires good a priori knowledge of of the external cost. Then, of course, there's the negotiation problem. Fortunately we have the Pigovian solution, the dual of the Coasian solution. Tax the land value and the harm to neighboring sites can be rectified a posteriori via the land value reduction. The land value tax (LVT) solution has been known to be efficient as well as fair since at least Adam Smith. In its most straight forward implementation we simply levy the risk free rate on the land assessment thus rendering the transaction value of the land zero. The impact of any positive or adverse change in municipal infrastructure or adjacent development is fully captured by the land value change which is then fully rectified by the corresponding tax in/decrease. Land value is a positive externality of everyone else's economic activity. And the land supply is totally inelastic which is another good reason why the LVT is the perfect tax. Henry George made a whole social movement out of it. Somehow it all got lost/repressed in the past century, but here we are apparently rediscovering this result in 2012. Apparently it's not just macro that's in a dark age.

I'm with Karsten: Land Value Tax solves so much of this problem. It promotes vertical living and urban renewal, turbocharges economic activity by funding the removal of other really dumb distorting taxes, and holds government to account as infrastructure spending must uplift land values. The west has been blowing giant land bubbles everywhere I look. LVT would be a useful automatic stabilizer moderating such excesses. But no, tax systems are designed to advantage the rentiers who disdain civic enablement and regard funding government as optional and discretionary.

"This may be a case when government has a useful role to play in lowering those transaction costs."

Its just what they do in China. Its good to see The Economist looking to China for Economic solutions. However, often development there causes a little more than more traffic noise. Often people have to move off commonly held land to be re-located into urban apartments. They are compensated financially and may receive other benefits such as training and jobs in local businesses. The issue is how much to pay them. Its very easy for a strong, wealthy authoritarian state to limit the size of payments to weak impoverished peasants.

How the institutions govern these transactions is politically determined. There is no 'natural' process based on market economics when power disparities between economic actors are so stark. Its fine to think that one shouldn't impose a loss on certain groups without compensating them as a matter of democratic principle. But getting the institutions to work in a 'fair' manner is hard when power is so skewed. Effective institutions are needed to pull it off. And they will be different in different places.

I'm from California, where these kinds of schemes went off the rails. The local development agencies were funded according to the same scheme. They would "develop" local communities - say building some pointless landmark - and then cash in when the residents were hit with upped property taxes. As they were "self-funding" the public didn't have control of the purse strings and they just went gang-busters on our neighborhoods, tearing apart communities as they saw fit.

And what happened because of these widely reviled institutions? There was a tax revolt which resulted in prop-13, which instead of removing these government nitwits cut the feet out from under our education system. California used to have some of the best schools in the country - now we're in the low 40s. Thankfully, they've finally been brought to heel by Jerry Brown (the one decent thing he's done as governor).

If there's going to be private development, that's fine. If your neighborhood does actually develop, I mean with more people living there and more businesses serving your neighborhood, your quality of life probably goes up along with your property values.

Private development is real development - it's not some box full of "art" or some stupid water fountain that runs in the middle of a drought.

You got payed. And allowing development will allow you to cash in. If you can actually do what you want with your private property, you can sell your house to someone who wants to build an office building and retire to the country.

If you're attached to where you live, you can get a reverse mortgage. That money can be used to book you a trip with your wife - that adventure you always wanted to go on. And if somebody messes with your mailbox, you SHOULD be allowed to bonk him on the nose. But you'll definitely have enough to afford balloons (house movers). Yes, development can help you go UP!

To go back a step, Coase's work is concerned with the very broad concept of "rights":

"I explained in 'The Problem of Social Cost' that what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions . . ."

Rights are complicated things because some supposed rights are subordinate to other rights. For example, a firm’s right to dispose of assets might be subordinate to the claims of a creditor who has taken a charge over those assets as part of the security of a loan facility.

What many economists overlook is that there is not one precondition embodied in this definition, but two:

a) that transaction costs are minimal; and

b) that the initial-state distribution of rights is well-defined. It doesn't matter how the law assigns rights, but it must assign them (somehow, anyhow) in order for negotiations to begin.

If the initial-state distribution of rights is not well-defined, how can the parties negotiate - even costlessly - to arrive at an efficient outcome? How can you negotiate to buy something you believe you already own? Consequently, statements concerning the "efficiency" or "inefficiency" of outcomes are meaningful only in the context of an assumed initial-state distribution of rights.

When dealing in the narrow domain of widely-accepted private property rights, it is relatively easy to establish the assumed initial-state. But when sovereign entities are introduced, there can be no such assumptions.

When it comes to the operation of sovereign governments, the critical issue is not just minimising transaction costs in order to arrive at an “efficient” bargain. Rather it is an issue of who actually owned the rights in the first place. If it is assumed that they did not own those rights in the initial-state (free and clear of subordination to any other rights), then an outcome may be “efficient” even if some participants are “unwilling”.

Individuals who believed - mistakenly - that they owned the rights in the initial-state may be dissatisfied with the outcome. But their dissatisfaction does not undermine its efficiency. By way of analogy, I may believe - mistakenly - that I have won the lottery, and I may be dissatisfied when the lottery officials point out to me that I have misread my ticket, but that doesn't make the outcome inefficient. I may believe - mistakenly - that I can safely walk across the lawn in bare my feet, and I may be dissatisfied when I am stung by a bee, but that doesn't make the outcome inefficient.

When people talk about Coasian solutions, they are often really making convenient assumptions about what they believe the initial-state ought to be.

As noted yesterday, the only “reasonable” solution to these problems is to aggregate ordinal preferences (which, being preferences, are neither reasonable nor unreasonable, and being ordinal are not amendable to the operations of cardinal arithmetic) using an aggregation device which has itself been selected in a reasoned way.

The proponents of urban density keep referring to the supposed “efficiency” of cities. But they have repeatedly failed to indicate how the much of the wealth of urbanites is attributable to rents to which they might have no initial-state right.

Ohio Turnpike Commission member resigns post,
lands a job with the toll road

Wednesday, February 15, 2012
By Tom Breckenridge

BEREA, Ohio -- A $5,000-a-year commissioner with the Ohio Turnpike resigned to take a $93,000-a-year job with the toll road.

Adam Greenslade, a lobbyist and Republican activist from Sandusky County, will start as the turnpike's government-affairs director on Feb. 27.

Greenslade's move follows the recent hiring of Dale Perram, a registered Republican and a $10,000 contributor to Gov. John Kasich's campaign. The semi-retired executive is the turnpike's new chief of operations with a salary of $103,000.